The crisis of all the western industrialised economies is one brought about
by the refusal of firms to invest, an investment strike. SEBhas
previously shown that for the Western economies as a whole the investment
strike is leading to two simultaneous trends. While the portion of profits that
remains uninvested is growing, payouts to shareholders are reaching record
levels and there is a growing cash mountain held by firms.

The chart below illustrates the growth of uninvested profits (and does not
appear in The Guardian article).

In 1970 the level of investment in the economy (Gross Fixed Capital
Formation) was equivalent to over two-thirds of the gross profits of firms
(Gross Operating Surplus). By 2000 this investment ratio (investment as a
proportion of profits) had fallen to a little over half and declined a little
more by 2007, just before the slump. But in 2012 the investment ratio had fallen
to just 43%. If this investment ratio were to return now to the 1970 rate, the
level of investment would rise by £122bn, or nearly 9% of GDP.
£75bn

There happens to be a neat coincidence between the current crisis and the
combined hoarding cash and the payout to shareholders. Up to the 2nd
quarter of 2013 (the 3rd quarter data are not yet available)
investment had fallen by £75bn, far more than the decline in GDP (now at £40bn).
£75bn is almost exactly the same rate at which companies’ cash hoard has been
growing annually since the crisis began in 2008. It is also slightly exceeded by
the anticipated payout to shareholders in 2013 of £80bn. Far from being ‘no
money left’ these two sources alone, shareholder dividends and the growing
cashing mountain, are double what is required to resolve the current crisis.

Recently government
ministers have taken to begging companies to invest their cash mountain,
after cajoling and bribery have both failed. This can be illustrated through the
government policy of cutting corporate taxes and the fallacy that this will spur
investment. In 1970 corporation tax was 40% and it has been slashed by this
government on the road to a 20% rate, but the investment rate has fallen by
around one third.

None of these government efforts will work. Privately owned firms are driven
by the concept of ‘shareholder returns’, which is itself counterposed
to economic well-being for the overwhelming majority of the population. For
them, only the restoration of profits will encourage investment, not pleas for
the general good.

The soaring level of uninvested profits, and their diversion towards
dividends and a growing cash mountain is the great disappearing trick of the
current economic crisis. Until it is resolved the fundamental source of the
crisis will remain unaltered.

Monday, 21 October 2013

Supporters of ‘austerity’ would have a very strong argument if there really
were no money left. In that case, opponents of current policy would be left
arguing only for a fairer implementation of those policies, or that perhaps they
could be implemented more slowly.

This is not the case. Firms in the leading capitalist economies have been
investing a declining proportion of their profits. This is the cause of the
prolonged period of slow growth prior to the crisis and a number of its features
such as stagnant real wages, so-called ‘financialisation’ and the growth in
household debt.

This negative trend of declining proportion of profits directed towards
investment reached crisis proportions in 2008 and is the cause of the slump. As
a consequence of the sharp fall in this investment ratio there has been a sharp
rise in the both the capital distributed to shareholders and in the growth of a
cash hoard held by Non-Financial Corporations (NFCs). This cash hoard is a
barrier to recovery, releasing it could be the mechanism for resolving the
crisis.

The chart below shows the level of surplus generated by US firms (Gross
Operating Surplus) and the level of investment (Gross Fixed Capital Formation)
for the whole economy. Since the former are only presented in nominal terms,
both variables are presented here in the comparable way.

Fig.1

The nominal increase in profits has not been matched by an increase in
nominal investment. In 1971 the investment ratio (GFCF/GoS) was 62%. It peaked
in 1979 at 69% but even by 2000 it was still over 61%.

It declined steadily to
56% in 2008. But in 2012 it had declined to just 46%.
In a truly dynamic market economy there is nothing to prevent the investment
ratio from exceeding 100% as firms utilise resources greater than their own
(borrowing) in order to invest and achieve greater returns.

Therefore even an
investment ratio of 69% is sign of a less than vigorous market economy.
However the subsequent decline in the investment ratio to 46% is a sign of
enfeeblement. If US firms investment ratio were simply to return to its level of
1979 the nominal increase in investment compared to 2012 levels would be over
US$1.5 trillion, approaching 10% of GDP. This would be enough to resolve the
current crisis, although it would not prevent the re-emergence of later crises.

Distribution of profits

The uninvested portion of firms’ surplus essentially has only two
destinations, either as a a return to the holders of capital (both bondholders
and shareholders), or is hoarded in the form of financial assets. In the case of
the US and other leading capitalist economies both phenomena have been observed.
The nominal returns to capital have risen (even while the investment ratio has
fallen) and financial assets including cash balances have also risen. One
estimate of the former shows the dividend payout to shareholders doubling in the
8 years to 2012, an increase of US$320bn per annum.

The growth of cash balances is shown in the following data from the Federal
Reserve. They are the changes in key balance sheet aggregates for US
non-financial corporations from 2008 to Q2 2013.
Change in Balance Sheet Components, US NFCs, 2008 to Q2 2013, US$bn.

2008

Q2 2012

Change

Total assets

29,881

33,662

3,781

Total net assets (deducting liabilities)

16,656

19,470

2,814

Non-financial assets

16,945

17,686

741

Financial assets

12,937

15,975

3,038

-checkable deposits

14

386

372

-time deposits

382

597

215

-non-financial item:
Business equipment

3,896

4,191

295

Source: Federal Reserve

Total assets of US NFCs have risen by nearly US$4trillion over the period
which is equivalent to approximately 25% of US GDP. The increase in net assets
of US$2.8bn (after accounting for the rise in liabilities over the same period)
is more than accounted for by a rise in financial assets of over US$3 trillion.

By comparison the rise in the current cost value of business equipment has been
less than one-tenth that (and is accounted for by inflation).

Within the rise of financial assets, cash or near-cash instruments have
contributed a rise of nearly $600bn (the biggest single contributor in the
accounts is ‘miscellaneous financial assets’).

Generalised phenomena

The same is true in other capitalist economies. In 1995 the investment ratio
in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012.
In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to
53%. In 2012 it was just 42.9% (OECD data).

The cash hoards are no less striking. The total deposits of NFCs in the Euro
Area rose to €1,763bn in July 2013 of which €1,148bn is overnight deposits. This
is a rise of €336bn since January 2008, nearly all of which is in overnight
deposits, €306bn. In Britain the rise in NFCs bank deposits has been from £76bn
at end 2008 to £419bn by July 2013.

In reality, this extraordinary accumulation of cash by NFCs began well before
the immediate depression in 2008, along with the slump in investment. Both of
these merit further elaboration elsewhere.

Conclusion

The profitability (profit rate) of US firms and firms in other Western
economies has fallen, and even the absolute mass of profits fell for a period in
the recession. While the former has not recovered, the latter has. But this has
not led to a corresponding rise in investment and the investment ratio has
fallen sharply.
The destination of of these uninvested profits is twofold. Owners of capital
are in receipt of record payouts. And the financial assets of NFCs have risen
dramatically, often primarily cash as firms are unwilling to risk any type of
investment.

This hoarded store of capital is both the main impediment to recovery and the
potential source of resolving the current phase of the crisis.

Friday, 11 October 2013

The latest publication from the Office for Budget Responsibility (OBR) is a strange document. It is a Forecast Evaluation Report which examines its series of completely wrong forecasts since it was established. Its firm assessment of these wildly over-optimistic forecasts is that it is not because it underestimated the impact of austerity, but then provides no other explanation for its consistent errors.

Despite this the OBR does provide some useful data on the economy and presents them in a very useful way. Below are a number of graphics taken from the latest publication.

Chart 2.1 (from the NIESR) shows the latest slump in historical context. The British economy is still 3.3% below its previous peak. In every other recession the lost output had been recovered after no more than 4 years. The current slump s already more than 5 years old.

Chart 2.23 shows how much further ‘fiscal tightening’ (combined spending cuts and tax increases) has been implemented and how much is still to come. The Fiscal Year 2012/2013 ended in April this year. By FY 2017/18 the fiscal tightening will be more than 3 times as great as the fiscal tightening already completed. If these plans are implemented, either by the Tories or by Labour, the next government will be implementing austerity measures twice as severe as anything seen to date.

The key problem for the whole economy remains one of contracting investment. In Table 2.1 the OBR shows that in the latest data business investment is the only component of GDP which has been negative. It also overwhelmingly accounts for the shortfall in growth relative to the OBR’s own forecast, 4% of total shortfall of 5.7%.

This is illustrated graphically the chart below, which highlights the components of growth relative to OBR forecasts. It is clear that business investment (blue) accounts for the bulk of the shortfall, with most of the remainder accounted by the shortfall in net trade (red). This is related to the fall in investment and the declining international competitiveness of the British economy.

What the OBR calls ‘Total Government’ has been the prop for the economy over the entire period compared to its own forecasts. But in reality there is no such thing as Total Government in terms of economic activity. The activity of Government, like every other economic agent can only either be consumption or investment.

Exceptionally weak growth caused the lack of business investment, a recent increase in government consumption combined with continued reductions in its own investment and the threat of much greater austerity to come; these are the prevailing trends in the British economy.

Friday, 4 October 2013

By Michael Burke
In a recent piece for The
Guardian the argument that government spending led the very weak recovery
has been reviewed in the light of the publication of the final GDP data for the
2nd quarter of 2013.

Because of revisions to the data, it is no longer statistically correct that
the entirety of the recovery is accounted for by government spending. The final
release from the Office for National Statistics (ONS) shows that real government
current spending began to rise after the 3rd quarter of 2011. By the
2nd quarter of this year government consumption had risen by £7.7bn.
Over the same period real GDP has risen by £11.7bn. As a result, the rise in
government consumption accounts for two-thirds of the weak recovery over the
same period.

It remains the case that the rise in government day to day spending led the
recovery. It began to rise in the 4th quarter of 2011 whereas GDP did
not begin to rise until the 3rd quarter of 2012, that is 3 quarters
following the rise in government consumption.

Therefore it remains the case that it was not austerity that led to the very
weak recovery. Instead, rising government consumption led the recovery and
statistically accounts for two-thirds of it. Changes in GDP and its components
are shown in the chart below, from Q3 2011 when government consumption began to
rise.

Chart 1

It is notable that household consumption is also rising and is the largest
single contributor to growth over the period. Meanwhile, despite all official
claims to the contrary investment continues to decline.

Since the recession began in 2008 the total decline in GDP has been £52bn and
despite all talk of recovery the economy is still 3.3% below its prior peak.
This is the worst performance in the G7 apart from Italy.

The decline in investment is much greater than the decline in GDP. Over the
same period the decline in investment (Gross Fixed Capital Formation) has been
£64bn, which more than accounts for the entire decline in GDP. The decline in
investment also led the slump as a whole. GFCF peaked in the 3rd
quarter of 2007 and over that period has fallen by £71.4bn. The fall in
investment more than accounts for the recession and led it. Business investment
alone (excluding investment by both government and private individuals) fell by
£43.2bn over the same period. By itself the decline in business investment
accounts for the bulk of the contraction in GDP of £52bn. This is the source of
the economic crisis, and is shown in the chart below.

Chart 2

Even while the government has been increasing consumption expenditures it has
continued to cut its own investment. Since the 3rd quarter of 2011
government investment has fallen by £1bn and since the Comprehensive Spending
Review of 2010 it has fallen by £4.4bn.

This reproduces all the worst aspects of British long-term economic decline.
Consumption is rising while investment is falling. No economic theory supports
the idea of consumption-led growth. This is for the simple reason that if the
productive capacity of the economy is not being increased simultaneously through
investment, then all that is being consumed is that productive capacity.

Despite much fanfare the government has not added any investment at all
during its time in office. Much of the large-scale investment currently taking
place such as Crossrail was inherited from the previous government and difficult
to cancel. Where it could cancel investment it did so, such as the building
programme for schools.

The government is content to cut investment while increasing its own
consumption and belies any notion the deficit-reduction or sustainable recovery
are the goals of economic policy.

To invest in plant, machinery, equipment (including transport equipment and
facilities) is to expand the means of production. Since the whole purpose of
austerity is to drive up the profit rate of private capital, increasing
state-led investment is ruled out. This would place an increasing proportion of
the means of production into state hands and not in the hands of private
capitalists. It is also why the government is willing to cajole, subsidise and
even bribe firms to invest but unwilling to invest on its own account. The lack
of success in this field is attributable to fact that those same firms do not
yet judge profits to have recovered sufficiently to risk increasing investment.

Therefore there remain only two paths out of the current crisis. The current
weak recovery is only supported by increasing government consumption and is not
sustainable (although it may be the intention to continue this up to the next
election). The private sector-led resolution of this crisis sought by the
government requires an increase in the profit rate to be achieved by cutting
wages, lengthening the working day and scrapping existing productive capacity.
The alternative solution remains state-led investment with the government
directing investment in key sectors of the economy, taking over a number of them
where necessary.